Forecasting

Forecasting

Business forecasting is the process of studying historical performance for the purpose of using the information gained to project future business conditions so that decisions can be made today that will assist in the achievement of certain goals. Forecasting involves taking historical date and using it to project future data with a mathematical model. Forecasts are extensively used to support business decisions and direct the work of operations managers. In this paper I will introduce different types of forecasting techniques.

What is Forecasting

Forecasting is the art and science of predicting future events. Forecasting is a statement about the future. “Operations management is designed to support forecasted performances and events. Specifically, operations managers allocate personnel, time, and resources in order to meet the demands of forecasts. The most successful companies achieve their results by assuming just such a proactive vice reactive posture.” (Forecasting) While forecasting is widely used, it does not fit into one model; multiple methods and models exist.

Forecasting Future Time Horizons

According to Heizer & Render, a forecast is usually classified by the future time horizon that it covers. Time horizons fall into three different categories: short-range forecast, medium-range forecast, and long-range forecast. Short-range forecast is from three months to one year. It is used for planning purchasing, job assignments, job scheduling, workforce levels, and production levels. Medium-range forecast ranges from three months to three years. It is used for planning, budgeting and production planning, cash budgeting, and analysis of various operating plans. Long-range forecast is generally three or more years in time. It is used in planning new products, capital expenditures, facility location or expansion, and research and development.

Types of Forecasting

Most organizations use three types of forecasts in planning operations for the future.

The three types of forecasting that are commonly used are economic, technological, and demand.

Economic forecasts are the planning indicators that are valuable in helping organizations prepare medium- to long-range forecasts; they address the business cycle by predicting inflation rates, money supplies, housing starts, and other planning indicators. Technological forecasts are long-term forecasts concerned with the rates of technological progress; they can result in the birth of new products, which may require new plants and new equipment. Demand forecasts are projections of a company’s sales for each time period in the planning horizon. These forecasts are also called sales forecasts. They drive a company’s production, capacity, and scheduling systems and serve as inputs to financial, marketing and personnel planning. (Heizer & Render)

Seven Steps in the Forecasting System

According to Heizer & Render, there are seven basic steps that are used in the forecasting system. These seven steps present a way of designing, initiating, and implementing a forecasting system. 1. Determine the use of the forecast. 2. Select the items to be forecasted. 3. Determine the time horizon of the forecast. 4. Select the forecasting model. 5. Gather the data needed to make the forecast. 6. Make the forecast. 7. Validate and implement the results.

Forecasting Approaches

The two major approaches of forecasts are qualitative and quantitative. Within each of these types are many methods and models. Quantitative forecasts are derived from objective data. Qualitative forecasts are based upon subjective data. Both of these methods are not suitable for each and every situation. The forecaster must understand the strengths and weaknesses